I. I
NTRODUCTION AND
B
ACKGROUND
1. This paper proposes the distribution of the remaining SDR 1.75 billion “windfall” profits from gold sales with the objective of facilitating subsidy contributions
to boost the long-
term sustainability of the Fund’s concessional lending capacity. The
proposal follows the broad support for such an approach expressed by Directors at the recent Review of the Facilities for Low-Income Countries on September 6, 2012.
1
In this context, the paper also seeks to address the concerns of those Directors who had preferred one of the
other two options for the use of the windfall gold sales profits.
2. The 2009 –10 gold sales resulted in total profits of SDR 6.85 billion. As required
under the amended Articles, currency amounts equivalent to the total gold profits were transferred in March 2011 from the General Resources Account GRA to the Investment
Account IA where they are being invested pending establishment of the gold endowment and the adoption of decisions on their disposition. In the context of the FY 2010 and FY 2011
income decisions, and consistent with the purposes and originally assumed size of the gold endowment under the new income model, the Board decided to place a total of
SDR 4.4 billion of the gold sales profits in the special reserve, which is not available for future distribution to the membership.
2
The Executive Board also decided to place the remaining amount of SDR 2.45 billion, corresponding to the windfall gold sales profits
reflecting profits above the price of US850 per ounce assumed when the key elements of the new income model were endorsed by the Board, in the general reserve, pending further
Board discussions. However, for policy and analytical purposes, reserves that directly reflect profits earned from the limited gold sales have not been
included in the Fund’s precautionary balances.
3. In February 2012, the Executive Board approved the partial distribution of the Fund’s general reserve in an amount equivalent to SDR 0.7 billion attributed to part of
the windfall gold sales profits.
3
This decision was adopted in implementing the strategy to use resources linked to gold sales profits to facilitate contributions of SDR 0.5
–0.6 billion in end-2008 NPV terms for the PRGT, as endorsed under the 2009 LIC financing package.
Consistent with the Board decision, this distribution will be effected once the Managing Director notifies the Executive Board that, in her assessment, satisfactory financing
assurances exist regarding the availability of at least SDR 0.630 billion for new subsidy
1
The Review of Facilities for Low-Income Countries 91312.
2
Review of the Fund’s Income Position for FY 2010 and FY 2011 41410 and
Review of the Fund’s Income Position for FY 2011 and FY 2012
4711.
3
Executive Board Decision No. 15092-1219
and Partial Distribution of the General Reserve Attributed to
Windfall Gold Sale Profits 2112.
contributions to the PRGT. Good progress has been made in securing pledges of new subsidy contributions to the PRGT in the context of the approved distribution of SDR 0.7 billion. As
of September 14, 2012, 123 members representing 86.62 percent of the approved distribution have confirmed their intention to contribute their share in the distribution or an
equivalent amount as subsidy resources to the PRGT.
4
Reaching the agreed threshold of 90 percent remains an urgent key priority to help complete the 2009 package.
4. The Board has discussed the use of the remaining SDR 1.75 billion in windfall profits on several occasions.
5
In April and September 2011, the Board considered three main options, including their use to facilitate additional contributions towards concessional
lending to LICs, to boost the Fund’s precautionary balances, and to add to the gold endowment. Views were divided, and many Directors saw merit in more than one of the
options.
5. More recently, at the September 6 review of LIC facilities, most Directors supported, or were open to, using resources linked to the remaining windfall profits
from gold sales as part of a strategy to make the PRGT sustainable. Directors noted that
the central challenge ahead will be to preserve the Fund’s ability to provide financial support to LICs in the face of the sharp prospective drop in the Fund’s concessional lending capacity
after 2014.
6. In light of that discussion, this paper includes a proposed decision that would provide for the distribution to the membership of SDR 1.75 billion in resources linked
to remaining gold sales windfall profits as part of a strategy to facilitate contributions that would make the PRGT sustainable.
Such an approach would mean that all of the windfall profits earned from the gold sales would have been proposed for indirect use in
boosting the Fund’s ability to support low income countries. In line with the approach followed for the distribution of SDR 0.7 billion, it is proposed that the distribution be
effected only after the receipt of satisfactory assurances that members will provide new PRGT subsidy contributions equivalent to at least 90 percent of the amount to be distributed
SDR 1.575 billion.
4
Of the 123 members that have confirmed their intention to contribute their share in the distribution, 92, representing 64.0 percent of the distribution, have confirmed that their share in the distribution can be
transferred directly to the PRGT subsidy accounts. Of the remaining members, 17, representing 9.6 percent, have requested that their shares be transferred to the Interim Administered Account pending the resolution of
domestic processes to allow a contribution to the PRGT, while 11, representing 17.7 percent, have requested transfer to their SDR accounts of their shares in the distribution, pledging to make a PRGT subsidy contribution
in an equivalent amount.
5
Use of Gold Sale Profits —Initial Considerations
31611, and IMF Considers Use of Gold Sale Profits
4811; and Use of Windfall Gold Sale Profits
—Further Considerations 8511; and
IMF Considers Use of Windfall Gold Sales Profits
91511.
7. The rest of this paper is organized as follows. Section II discusses the financial impact of this proposal on the self-sustaining capacity of the PRGT and the financial
implications for the Fund. Section III discusses key legal, financial and operational aspects of the distribution, including modalities to facilitate members’ ability to transfer amounts
distributed to them as PRGT subsidy contributions. The text of the proposed decision is set forth in Section IV.
II. A S
ELF
-S
USTAINED
PRGT
AND
F
INANCIAL
I
MPACT OF THE
P
ROPOSAL
A. Self-Sustained PRGT 8. The lending capacity of the PRGT is projected to decline sharply after 2014.
6
The 2009 LIC financing package aimed to increase the Fund’s concessional lending capacity to
SDR 11.3 billion during 2009–14. Taking into account commitments of SDR 6.9 billion made under new PRGT arrangements during 2009
–12, the PRGT has a remaining lending capacity of about SDR 2.2 billion annually through 2014 Table 1. However, after this
period, and assuming that all capacity provided under the 2009 financing package has been fully utilized, a
―self-sustained‖ PRGT relying solely on the remaining resources in the Trust to generate necessary additional subsidy resources would have the capacity to subsidize
permanently annual commitments of only about SDR 0.73 billion Box 1.
7
6
Update on the Financing of the Fund’s Concessional Assistance and Debt Relief to Low-Income Member Countries
43012.
7
Projections of self-sustained lending capacity of SDR 0.7 –0.8 billion from 2015 assume the resumption of
GRA reimbursement for the cost of administering the PRGT from FY 2013.
Box 1. PRGT Reserve Account RA and Long-Term Lending Capacity Self-sustained lending.
The concept of self-sustained lending has evolved over time: the idea of self-sustained concessional lending was formally considered by the Executive Board in 1995,
entailing an objective to utilize the balance in the RA on a permanent basis to generate subsidy resources required to support concessional lending. During later discussions 1999, it was envisaged
that the resources in the RA would be sufficient to finance permanently both loan and subsidy resources. Under the concept that was confirmed by the Executive Board during discussions on the
2009 LIC facilities reform, the balance in the RA would be used to provide additional subsidy resources, while loan resources will continue to be provided by members. Under the framework of
self-sustainability proposed in this paper, with self-sustained operations assumed to commence in 2013, subsidy resources to support concessional lending would initially be generated by available
balances in the PRGT subsidy accounts as well as the RA, with resources in the PRGT subsidy accounts run down over time.
Reserve Account.
The main purpose of the Reserve Account RA is to provide security to PRGT lenders and note purchasers. The RA has been financed by reflows of Trust Fund and Structural
Adjustment Facility repayments which themselves are derived from long-ago sales of pre-Second Amendment gold, as well as investment returns on balances held in the RA. The PRGT can tap these
resources temporarily to meet its obligations in the event of a delayed payment by a borrower to any loan account of the Trust. The balance in the Reserve Account amounted to SDR 3.9 billion at
end-June 2012, representing a substantial multiple of the projected PRGT repayments falling due over the next twelve months and about 74 percent of total PRGT obligations. It is expected that the RA
will continue to provide a loan coverage ratio of about 40 percent in the medium term, in line with the historical average.
Estimating self-sustained capacity.
The annual self-sustained capacity is calculated so that, after an initial ramp-up period, subsidy needs are equal to net earnings on the RA. The initial ramp-up period
constitutes the period between the commencement of self-sustained lending operations and the point when repayments on existing credits offset new disbursements. Estimates of self-sustained capacity
are sensitive to assumptions regarding key variables, including i the start date; ii reimbursement cost to the GRA for administering the PRGT; iii interest rate paid to PRGT lenders; iv the
investment premium, i.e., the excess of the interest earned on investment of RA balance over the rate paid to lenders; and v the composition of lending arrangements, i.e., the share of ECF, SCF, and
RCF arrangements.
9.
The staff’s longer-term projections suggest that, in the absence of additional resources, demand for concessional financing is likely to exceed this projected
self-sustained lending capacity of the PRGT by a wide margin.
8
Staff projections indicate that longer-term
demand for the Fund’s concessional lending could on average be in the range of SDR 1.2–1.9 billion annually in the two decades from 2014, compared to a
8
Review of Facilities for Low-Income Countries 72612.
self-sustained capacity of SDR 0.7 billion.
9
In the first decade, demand is projected to be in the range of SDR 1.0–1.7 billion annually. Large reductions in access to PRGT resources
after 2014 would therefore be unavoidable unless new concessional resources can be identified.
10. Using the remaining gold sales windfall profits as part of a strategy to facilitate contributions to the PRGT would raise the self-sustaining lending capacity of the PRGT
to SDR 1¼ billion. If new commitments were to average SDR 2.2 billion annually in
2013-14 the maximum capacity available under the 2009 financing package, and using resources linked to the remaining windfall profits, the self-sustaining capacity of the PRGT
from 2015 onwards would be SDR 1.1 billion.
10
However, based on current staff projections, demand is expected to be significantly lower than this maximum capacity in the next two
years. If the principle of self-sustainability was applied starting now, incorporating the remaining capacity under the 2009 LIC financing package as well as resources linked to the
remaining windfall profits, the self-sustaining capacity would increase to about SDR 1¼ billion Table 1, which could be considered as the base envelope for the
self-sustained PRGT.
11. The staff proposes that the decision to distribute the remaining windfall profits be considered as part of a strategy to make the PRGT sustainable.
The strategy is aimed at ensuring that the Fund has the resources to meet the projected demand for IMF
concessional lending over the longer term, and would rest on three pillars:
9
The methodology underlying these projections is described in footnote 17 and Appendix VI of Review of
Facilities for Low-Income Countries 72612.
10
This capacity is based on the assumption that 90 percent of the remaining gold sale windfall profits are pledged to the PRGT as subsidy resources.
Starting 2015
Starting 2013
Starting 2015
Starting 2013
2.08 1.71
1.50 2.24
0.73 0.91
1.11 1.25
1 Projections assume the resumption of reimbursement of the GRA for the cost of adminstering the PRGT. 2 Original projections at the time of approval of the 2009 LIC financing package.
Original projections,
2009-12 average 2
3 The enhanced scenario assumes transfer to the PRGT of SDR 1.575 billion in the second half of 2013. Table 1. Projected Annual Lending Capacity, Various Scenarios 1
Baseline Enhanced 3
Self-sustained PRGT operations Actual
outcome, 2009-12
average Remaining
capacity, 2013-14
average Original
projections, 2013-14
average 2 2009 LIC reform
SDR billions
A base envelope of about SDR 1¼ billion in annual PRGT lending capacity that is
expected to cover concessional financing needs over normal periods.
11
While financing commitments can vary substantially from year to year, the self-sustaining PRGT can
build up capacity in years with low levels of new lending commitments and draw down capacity in years with higher demand. This implies that the base envelope could cover
periods where demand in individual years could be much higher as long as the fluctuations average out over a number of years.
12
Contingent measures that can be put in place when average financing needs exceed the
base envelope by a substantial margin for an extended period. The semi-annual PRGT financing update papers and future reviews of LIC facilities will provide updates on the
recent use of resources, projected needs, and the resulting current self-sustaining capacity. If based on these reviews, the Board considers that the self-sustaining capacity
would decline substantially below SDR 1¼ billion, it could decide to activate a range of contingent measures including i reaching additional understandings on bilateral
fundraising efforts to be supported by a broad range of the membership, with contributions from traditional and non-traditional donors to the PRGT; ii the suspension
for a limited period of time of the reimbursement of the GRA for PRGT administrative expenses, pursuant to the current decision governing such reimbursements;
13
and iii modifications of access, blending, and interest rate and eligibility policies to reduce the
need for subsidy resources.
A principle of self-sustainability under which future modifications to LIC facilities
would be expected to ensure that the demand for IMF concessional lending can be met with the resources available under the first and second pillar under a plausible range of
scenarios.
14
For example, the upcoming review of PRGT eligibility and the second stage of the review of facilities should ensure that all modifications, taken together, would,
over the longer term, keep demand consistent with available resources.
11
Under this framework, the available resources in the PRGT subsidy accounts would be gradually drawn down to a zero balance, while balances in the Reserve Account would be allowed to grow, and be used to subsidize
concessional lending after the period in which available balances in the PRGT subsidy accounts have fallen to zero.
12
This approach would not limit the lending capacity for 2013 –14 that was envisaged under the 2009 financing
package, as fluctuations in demand can be accommodated under the base envelope.
13
Executive Board Decision No. 14093-0832
, adopted April 7, 2008. This decision specifies that the Fund should temporarily suspend reimbursement if it determines that the resources of the PRGT are likely to be
insufficient to support anticipated demand and the Fund has been unable to obtain additional subsidy resources. The decision also provides that upon suspension, the Fund will engage donors with a view to restoring the
sustainability of the PRGT.
14
Specifically, any modifications to access, financing terms, blending, eligibility and other relevant policies would be expected to be designed in a way that average demand in normal periods could be covered through the
resources available under the first pillar, and that periods of high financing needs, e.g., as a result of significant shocks, could be covered through the contingent mechanisms.
12. This strategy is expected to make the PRGT sustainable under a wide range of demand scenarios for the short, medium, and longer term.
If total financing needs remained at the average level seen since the peak of the crisis in 2009 and absent a systemic
shock or exceptional needs of individual members, the base envelope is likely to cover the needs in 2013
–14, as well as in 2015–24, where demand is projected to be in the range of SDR1.0
–1.7 billion.
15
In the event that demand has substantially exceeded the base envelope for an extended period, e.g., as a result of global or regional crises, contingent mechanisms
would be used with a view to maintain self-sustaining capacity at the base level of SDR 1¼ billion
—these could include a combination of bilateral fundraising efforts and suspension of reimbursements to the GRA. If financing needs turn out to be even higher,
access, blending, and interest rate policies could be reviewed alongside PRGT eligibility with a view to reducing the need for subsidy resources and ensuring that the existing resources are
targeted at where the needs are greatest.
13. In addition to supporting a sustainable framework for PRGT financing, this proposed approach would also provide for wider burden sharing of the subsidy costs of
the PRGT. Following the receipt of the necessary assurances, the increased resources that
would be facilitated by the proposed distribution of the remaining windfall gold sales profits would provide for a large injection of subsidy resources into the PRGT. The nature of this
operation, as described below, would ensure very broad burden sharing based on members’ quotas in the Fund. The envisaged shift to self-sustaining operations would be expected to
result in limited, temporary, recourse for future bilateral fund-raising as described above. Should such fund-raising be required, contributions would be sought from a wide range of
the membership.
B. Financial Implications for the Fund 14. In addition to the current proposal, the Board has considered two other primary
options for the use of the SDR 1.75 billion in remaining windfall gold sales profits. In the
discussions held in April and September 2011, in which no consensus emerged, there was also support for counting these resources towards precautionary balances, or investing them
as part of the Investment Account’s endowment.
15
New concessional commitments during 2010 –12 were SDR 1.5 billion on an annual average basis, and
SDR 1.3 billion not counting the large request from Bangladesh, which exceeded by a considerable margin the absolute level of access that is provided in most cases. Looking ahead, total financing needs are expected to be
broadly stable in nominal terms over the next decade, as the effect of graduation from PRGT eligibility would be roughly offset by rising indicators of demand such as GDP and openness from the countries that would
remain PRGT eligible. Nominal financing needs are expected to be somewhat higher in 2025
–34, although uncertainty around this projection is considerably higher as it depends significantly on the timing of graduation.
15. In April this year, the Board increased the indicative medium-term target for precautionary balances from SDR 15 billion to SDR 20 billion.
16
Directors noted at the time that credit risks had continued to rise, reflecting a further sharp increase in demand for
Fund resources, mainly from Europe. The new medium-term indicative target of SDR 20 billion is expected to be reached in FY 2018, reflecting the further projected increase
in Fund credit, much of which is subject to surcharges on top of the margin for the rate of charge.
16. A decision to distribute a portion of the general reserve attributed to the remaining windfall profits as part of a strategy to make the PRGT sustainable would
not reduce the current level of precautionary balances. This is because the portion of the
general reserve attributed to these profits does not count towards precautionary balances. A decision to count the remaining gold sales windfall profits in precautionary balances would
have allowed the targeted level of precautionary balances to be reached one year earlier, i.e., FY 2017. However, during the April discussion, most Directors considered the pace of
accumulation towards the new target of SDR 20 billion
—which did not assume that windfall profits from gold sales now held in the general reserve would count towards precautionary
balances —to be adequate, but that it should be kept under close review.
17. The proposed distribution would reduce the Funds general reserve, which is available in the event of financial losses.
Even though the windfall gold sales profits are not currently counted as part of precautionary balances, they are part of the Funds reserves,
which provide an important buffer to handle financial losses as part of the Funds risk mitigation framework. The proposed distribution would reduce the size of that buffer and
could have broader consequences in the event that financial risks materialize. For example, the Fund
’s lending has significantly increased in recent years, and if some of the associated risks were to materialize and the Board saw a need to accumulate additional reserves, this
could require an increase in the rate of charge andor the surcharges applied to borrowing members.
17
18. The other option of adding remaining windfall profits to the endowment would significantly boost its size.
The endowment has been set at SDR 4.4 billion, a size which corresponds to the profits from gold sales at the 850 per ounce assumed when the key
elements of the new income model were endorsed by the Board. Adding the remaining windfall profits would increase the size of the endowment by about 40 percent to
16
IMF Executive Board Reviews the Adequacy of the Fund’s Precautionary Balances
41212.
17
A 50 basis point increase in the margin for the rate of charge, would, assuming full disbursement of approved access under arrangements approved to date, generate an additional SDR 1.75 billion in reserves over a period
of about four years.
SDR 6.1 billion. This would help reinforce the principles underlying the new income model, particularly given the uncertain prospects for investment returns from the endowment.
However, in the recent discussion of the investment mandate, while acknowledging that the 3 percent real return target endorsed by most Directors in the previous discussion would be
difficult to achieve in the near to medium term, most Directors considered it appropriate to retain long-term capital market assumptions to guide portfolio design, noting the long
horizon of the endowment.
19. Although subject to considerable uncertainty, t he Fund’s income outlook is also
